When it comes to real estate investing (and actually most things), you need to rememberย that value is different than price. A stonemason in Jesusโ time was paid the equivalent of one ounce of gold per week in silver. A stonemason in 1776 was paid $20 per week, which equaled aboutย one ounce of gold. A skilled stonemason today is paid $1,200+ a week right now, which is, you guessed it,ย equal to about one ounce of gold. So what’s the point? Well, the point is that gold is a good measure of value.
When weย look at properties and housing, it can be really valuable to use gold as aย standard. For example, in 1910, a new three-bedroom, two-bath home cost $5,000, which was about 200 ounces of gold in that time. In 2010, a new three-bedroom, two-bath home cost $200,000โwhich is about 200 ounces of gold. While gold has been stable, housing prices have not been. And this is why it’s important to look atย value.
I don’t often share this story, but here goes.ย Back in Texas a while ago,ย I wrote a contract on a house on a beautiful golf course. It wasn’t a mansion by any means, but it was gorgeous!
It wasn’t a hot market and it was a good buy. Thisย 3,600-square-foot house had been foreclosed on and needed some renovations. Thereย was an estate sale after the couple passed and their kids were just trying to unload it. The last appraisal on the house had been at about $225,000, but it was in a cheaper area for that kind of price. I was ready to buy. I wrote a contract for $135,000 cash andย said I would close in ten days.
I thought I had the deal sewed up. I brought in my contractor (we had a home building company down there called Covenant Homes) and he looked at it andย said, “Bill, I can turn this around for $25,000. Weโll be in and out and youโll be close toย $160,000.” I was excited about that.
So I wrote the contractย and submitted it.ย Now around the time theyย were supposed to accept the contract, this guy I’d known for years came in and offered them $175,000. Now Iโm thinking, I know this guy. He is a Scrooge.ย Iโm telling you he had the first dollar he ever made. And heโs coming in offering them $175,000. Am I missing something?
Iย happened to be in the office at the time he came in to make the offer. He popped his briefcase open and it felt like a Treasure Island scene: his briefcase was full of gold coins. So naturally, I asked, “Whereโd you get all of those gold coins?” And he said, โBilly Wayne, I bought those years ago.โ
When he purchased those coins, gold was much cheaper per ounce. At the time of our duel for housing, the cost of gold had gone up. He bought the gold for $200 an ounce and by the time he purchased that house it was worth $800 an ounce.
This guyย bought that house in his own money for about $50,000, but he paid them $75,000 because it had escalated so much fromย what he originally paid forย the gold. And that showed me the difference between value and price.
Gold is a good standard of value. Itย willย fluctuate. But it shows you how when you look at properties, you need to not just ask how much does it cost, butย ask how much is it worth. Those areย two different questions.
How do you define the difference between cost and worth?
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